UK Economy Shrinks in October as Budget Uncertainty Weighs on Growth

GDP falls 0.1% for second month in a row as businesses and consumers hold back

October Sees Another Economic Contraction

The UK economy contracted by 0.1% in October, according to data released by the Office for National Statistics (ONS), marking the second consecutive monthly decline and falling short of market expectations of 0.1% growth

This contraction comes amid heightened uncertainty surrounding the Autumn Budget and cautious consumer and business sentiment.

Key Points at a Glance

• GDP shrank 0.1% in October, matching September’s decline.
• Annual growth was 1.1%, below the forecasted 1.4%.
• Manufacturing output rose by 0.5%, boosted by Jaguar Land Rover’s post-cyber attack recovery.
• Autumn Budget anxiety led to lower investment activity.
• Bank of England expected to cut interest rates in response to cooling inflation.

Why Did GDP Decline?

October’s economic dip has been largely attributed to reduced activity across services and construction, combined with subdued consumer spending.

A key factor behind the hesitation was uncertainty around the government’s fiscal direction. While Chancellor Rachel Reeves eventually raised some taxes to fund welfare and reduce the deficit, speculation in October may have held back economic momentum.

A Mixed Manufacturing Picture

One brighter spot was the manufacturing sector, which rebounded with 0.5% growth. This came after a 1.7% fall in September and was supported by Jaguar Land Rover resuming production at its factories following a major cyber attack

However, services—the UK's largest economic sector—continued to stagnate, weighing on overall performance.

Consumer Confidence and Inflation Outlook

The decline in activity comes as inflation showed signs of easing. Consumer price inflation dropped to 3.6% in October, down from 3.8% in September. This aligns with the Bank of England’s projections and raises hopes for potential interest rate cuts in the coming months

The BoE held interest rates at 4.0% in November, although nearly half the Monetary Policy Committee members favoured a cut. Analysts now widely expect a rate cut to 3.75% at the BoE’s final meeting of the year.

Business Outlook and Forecasts

Despite recent contraction, the Confederation of British Industry (CBI) has raised its forecast for UK growth. It now expects GDP to grow by 1.4% in 2025 and 1.3% in 2026, up from earlier predictions

CBI Chief Economist Louise Hellem commented:

“While it’s welcome to see our growth forecast upgraded for next year, the mood music reads more ‘cautious optimism’ than ‘cause for celebration’.”

What This Means for Investors

Investor sentiment remains mixed. While interest rate cuts could support consumer spending and investment, persistent weakness in key sectors like services and construction is a concern.

Markets have reacted cautiously:

• FTSE 100 has remained largely steady, pricing in expectations of a rate cut.
• Sterling saw slight weakness due to the economic slowdown.
• Bond yields dipped in response to lower inflation expectations.

A potential shift in BoE policy, alongside improved budget clarity, may offer more stability in early 2026.

Final Thoughts

The UK's economic performance in October underlines the fragile state of the recovery, with political and fiscal uncertainty playing a key role in dampening momentum. While inflation is easing and rate cuts are likely, sustained growth will depend on stronger performance across services and construction in the coming months.

Sources: (Investing.com, Reuters.com)